Daily Development for
Thursday, December 31, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

This relatively brief case contains two distinct points, both of them very subtle issues that can become important when disputes arise and that the landlord ought to be addressing in lease language. Pull out the form leases there are lessons to be learned here.

LANDLORD/TENANT; ASSIGNMENTS AND SUBLETS; PRIME TENANT'S OBLIGATIONS: A commercial lease tenant who has sublet to another is not obligated to tender rent payments to landlord after landlord has repudiated the lease.

KMT Enter., Inc. v. Nyssen, 959 P.2d 640 (Or. Ct. App. 1998).

The Nyssens leased a commercial building to KMT Enterprises, Inc. (KMT), which KMT sublet to a thirdparty. The lease contained an option to purchase which became quite valuable over time, and likely was the real concern of both parties in the subsequent dispute over the lease's continued vitality.

Under both the lease and the sublease, KMT was obligated to maintain the roof in good repair. When sublessee complained of a leak in the roof, KMT attempted to repair it. Dissatisfied with the repairs, sublessee contacted the Nyssens directly and complained.

The Nyssens sent KMT a notice of default and gave KMT ten days to repair the roof or the lease would be terminated. In spite of KMT's letter requesting more time to fix the roof, the Nyssens declared KMT in default and demanded KMT to quit the premises. Thereafter, however, KMT sent its regular monthly lease payment to the Nyssens by check, which the Nyssens cashed. Two weeks after accepting KMT's lease payment, the Nyssens sent a letter to KMT declaring the lease and the sublease terminated. The Nyssens later entered into a lease directly with the former sublessee and undertook to repair the roof, changed the locks, and sent several letters to KMT barring them from the premises.

During the period of the dispute, KMT tendered no further rent to Nyssens.

KMT sought to enjoin Nyssens from terminating the lease, arguing that Nyssens had waived any purported default in maintaining by accepting late rent thereafter. They prevailed on this point in the trial court, but Nyssens then sent additional notices of default claiming default for nonpayment of rent from the time the dispute first arose and also claiming default for KMT's failure to reimburse Nyssens for the $24,000 in roof repairs.

The Oregon Court of Appeals affirmed that the Nyssens waived their right to terminate the lease by accepting KMT's further performance. As to the issue of whether KMT subsequently owed rent, the court ruled that, when a commercial tenant is not in possession of the premises, and landlord has repudiated the lease, the commercial tenant is not obligated to continue paying rent. It distinguished prior authority that had imposed a continued rent duty upon the tenant following repudiation where the tenant had remained in possession. Note that it appears that the subtenant had regularly paid rent either to Nyssens or to KMT as time went on.

Therefore, the court declared that Nyssens had no right to declare a default for KMT's failure to pay rent following the Nyssen's unlawful repudiation of the lease.

Comment: The point, of course, is a very technical one in this case, because the subtenant's rent payments were the same as those the landlord had been collecting from the prime tenant. But the court does not make clear what would occur if there were significant differences between sublease and lease payments. Presumably, since the landlord is viewed as repudiating here, the tenant should continue to enjoy the benefit of any difference. How that would work out in practice is somewhat problematic.

LANDLORD/TENANT; LANDLORD'S REMEDIES; LANDLORD'S RIGHT TO REIMBURSEMENT: Absent language in the lease, the tenant has no duty under the lease to reimburse landlord for landlord's conducting of repairs that tenant is obligated to perform, but landlord may have a right to collect the cost of repairs in a separate suit for unjust enrichment.

KMT Enter., Inc. v. Nyssen, 959 P.2d 640 (Or. Ct. App. 1998).

The facts of this case are reported under the heading: "Landlord/Tenant; Assignments and Subleases; Prime Tenant's Obligations." The narrow, but important point in this separate part of the opinion had to do with whether the tenant, who the court concluded did have a contractual duty to repair the roof, was in breach of the lease for failure to reimburse landlord when landlord proceeded to repair the roof prior to lawfully declaring the tenant in default.

The landlord, note, had attempted to declare a default, but the court held that the default had been waived by the landlord's continued acceptance of rent from the tenant.

The court held that the lease did not expressly contain a provision giving the landlord the right to make required repairs and hold tenant responsible under the lease. It noted that such a provision is not uncommon, and therefore the parties' failure to include it in the lease demonstrated that they did not have that intent here.

Note, however, that the landlords were able to recover the cost of the repairs in a claim for unjust enrichment. They nevertheless were stuck with the tenant still on the lease which, because of the presence of a valuable purchase option in the lease, the landlords had attempted to avoid.

Comment: Landlords, of course, frequently insist that tenants do not have the right to conduct their own repairs and deduct them from the rent. But certainly the making of required repairs is a reasonable mitigation action by either landlord or tenant following the default of the party with the repair responsibility, and the cost of such repairs would appear to be an element of damages.

But damages are not the question here. The question is whether the landlord had the additional right to declare the lease in default after it had made the repairs itself, either for tenant's non performance of its lease obligation to repair or for its failure to compensate landlord for its work.

The problem, apparently, was that the default clause required a notice that gave tenant ten days to cure, and since the roof was fixed, there could be no notice demanding repair. Further, as the court notes, there was no specific right under the lease to compel the tenant to pay the cost of landlord's repairs.

The proper bargaining balance in most cases would appear to be that a landlord should have the right to terminate the tenancy of a tenant who refuses to perform necessary repair, even after the landlord makes the repairs. But this balance, apparently, must be struck through good lease drafting. This is only one of several lease drafting lessons in this case. It should add three or four dense paragraphs to every form landlord's lease.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1-6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.